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March 20, 2013

Equities Are Hot, but Affluent Investors Won’t Bite: Legg Mason

New survey finds rich like stocks for income, but remain in fixed assets

Watch what clients do, not what they say. It seems affluent investors once again like equities for income, but are holding fast to their fixed asset allocations.

A new survey of affluent U.S. investors by Legg Mason finds almost three-quarters (74%) said “now is a good time to be invested in equities” with 52% adding that they are more inclined to use equities to generate investment income.

Combining this optimism with the fact that fully 66% reported that income investing was a “top priority,” 40% of respondents reported they were invested in equity income mutual funds, and only 25% of those who use income-generating investments said they planned to increase their allocation to equity income funds over the next 12 months.

Just 9% said they intend to decrease their equity exposure over the next 12 months, and even less (5%) plan to reduce their fixed-income positions. Interestingly, 60% also believed it was a good time to be invested in real estate for income, and 15% intended to increase their allocation to this asset class.

But the survey also notes that although they place an increasingly higher priority on income investing, almost half (48%) said they were generating less income than they had hoped from their portfolios.

The survey opines that this might be less a function of the market and more a result of their expectations; on average, U.S. investors who use income-generating products said that their desired return was 8.5% and that they were receiving on average 5.9%.

“Income-oriented investors need to consider strategies that are focused on outcomes,” Matthew Schiffman, managing director and head of global marketing at Legg Mason Global Asset Management, said in a statement. “Start by establishing a realistic rate of return based on long-term goals or the need to satisfy liabilities with income. Our survey is telling us that income-oriented investors in the U.S. are coming up well short of their goals–almost 3% short–and that number could be significant, especially for retired investors who need to live on the income their portfolios generate.”

The most significant challenge investors said they faced to income investing was “having to accept risk to obtain good yields”—ranked as the leading challenge among 16 challenges evaluated.

Investors also cited a number of specific factors that gave them anxiety when it came to meeting their income-producing needs. More specifically they cited market volatility (59%) and higher taxes (56%) as the leading producers of anxiety, followed by inflation (55%) and the low-interest-rate environment (52%).

Yet in spite of their trepidation, more than half (51%) said they were willing to take on more risk to achieve greater investment income.

U.S. investors said they had just 11% on average of their income-producing assets invested internationally. As measured against investors from 12 other countries surveyed by Legg Mason, the U.S. investor has the smallest amount invested internationally.

Legg Mason, through Northstar Research Partners, surveyed 500 U.S. investors with at least $200,000 in investable assets.